Please forward to near the end of the review. Gordon talks of Australian expansion just before they actually started. VERY illuminating.
Ryman Healthcare Ltd [RYM.NZ], the retirement village and aged care provider, is one of the NZX's best performing companies and historically it has increased earnings by at least 10% for each of the last 10 years.
Its full year result to March 31 2010 was up 16% on last years 2009 full year and indications are that these sorts of results are likely to continue for the foreseeable future considering the increasing age demographics for the New Zealand population and the seemingly unparalleled popularity of their offering to their prospective customers.
It seems a well managed business with unlimited prospects. In fact you would find it hard to find anything negative written about the company and the way that it is run.
Little is known about who the company is run by and how -they just get in and run the business and get good results - and I would like to know what is behind the hype of promised increased returns forever. Is this company going to achieve the lofty results of the past into the future?
With these things at the centre of my mind I flicked off an email to Ryman in Christchurch and got back a response from the Chief Financial Officer, Gordon MacLeod who kindly agreed to a Share Investor Q & A.
The Q & A was conducted via email .
The Q & A
Share Investor - Congratulations on a great full year result to 31 March 2010. Was this expected by management or a surprise given the state of the economy?
Gordon Macleod - Our growth in realised profits of 16% to $61m was mainly driven by strong growth in earnings from completed villages. This growth reflects our portfolio doubling in size over past 5 years – feeding through into earnings – and higher occupancy. So, we experienced higher care fees, management fees and resale gains in addition to the initial earnings from the three new villages opened in 2010. Most importantly, this increase in profitability was also reflected in even stronger growth in operating cashflows, up 31% to $149m.
The growth in earnings was therefore not a surprise to management, and reflects the robust nature of our business model along with the very real need we are serving to the elderly.
SI - Ryman Healthcare has had significant growth in the size of the business, its revenue and long-term returns to shareholders since listing in 1999. Are you able to continue with this sort of growth for say the next 10 or 11 years or do you see a tail-off, for whatever reason, of these sorts of spectacular results?
GM - We believe that Ryman will grow strongly for many years to come for a number of reasons. There remain many locations throughout New Zealand which are ideally suited for a Ryman village, and we are continuing to see a strong number of land opportunities from which we will continue to pick the best.
Most importantly, we are now entering a prolonged period where the elderly population will increase at a significantly faster rate than ever before. In fact, the number of people aged 75 years and over is set to increase on average by 12,000 per annum for the next 20 years.
Add to this the harsh reality that although we are living longer we are also somewhat frailer. Recent medical research estimates that men spend the last 6.8 years, and women the last 9.1 years, of their lives with the limiting diseases of old age. In addition, it is also expected that the incidence of dementia is set to rise by 50% and osteoporosis and osteoarthritis by 40% by 2025.
Our confidence in Ryman’s future prospects is therefore not just the result of the quality of what we do – our purpose designed villages meet a very real, and growing, need in the community.
So, our medium term earnings target is to grow realised profits 15% per annum, or put in more simple terms - to double the size of the business every five years.
SI - Do you anticipate continued growth of the aged care sector in general or do you see a plateau sometime in the future?
GM - Given the growth in our elderly population expected over the long term (as outlined above) it is hard to see a plateau – the demand will just get stronger over the next 20 years. Capacity in the sector generally is getting tighter, and there is very little in the way of new build going on (except for Ryman), so we expect very strong demand.
SI - Is your growth rate above that of the rate of growth of the elderly population?
GM - Since listing in 1999 our growth has significantly exceeded the rate of growth in the 75 plus population – our realised profits are up ten fold from $6m to $61m, whereas the 75 plus population has increased by 30% over that same time frame to 256,000. So our growth in realised profits has far exceeded the demographics growth rate. Market share wise we are only just over 12% of the retirement village market (ie independent and serviced units) and 5% of the aged care market (ie rest home, hospital and dementia beds).
Reader Question - What is your projected yearly growth rate in net profit for the next five years? Also, what would a 10% decrease in residential property prices have on net profit, say over a 1 year period?
GM - Approximately half of our realised profits are retained for our organic growth strategy, as the business model provides returns well in excess of our cost of capital. We aim to grow our dividends in line with our realised profits, so shareholders should expect growing dividends in addition to our capital growth.
SI - What kind of profit margins are you achieving and have they been maintained as the company has grown?
GM – Our overall realised profit margins have averaged just over 20% for many years and we have maintained this rate.
SI - Interest free loans for senior staff of up to $2 million to buy shares as pointed out in the 2010 Annual Report. Shouldn't senior employees use their own money to buy shares and wouldn't that be a better incentive for them to achieve positive results?
GM – Our Board views it as important that management’s long term interests are aligned to those of long term shareholders, with the on market share scheme representing an important part of the senior management remuneration package. The Board (and shareholders for that matter) prefers the on market purchase mechanism ahead of share options. This is because they are non dilutive, as existing shares are bought on market – rather than share options which constantly impact the issued share capital for existing shareholders.
SI - How hard is it to purchase suitable sites for a reasonable price for your villages and has the recession provided some added opportunity in this area?
GM - We have seen a number of good opportunities over the last two years, our landbank is very healthy, and we continue to explore potential new sites. It has been a good time to buy, as there are very few competing bidders with too much cheap debt. Prices are therefore more sensible than before. We now have 4 to 5 years’ worth of stock in the landbank which is a strong position to be in.
SI - Could you envisage another style of aged care in your business, say a move away from the "village" type layout of your properties to a more self contained, self sufficient sort of living?
GM - Our residents tell us that our lay out works very well, and this has been the case for many years. A Ryman village is tailor designed by us to meet the needs of the elderly, and includes a range of care options to ensure we can meet our residents needs as their health needs change. It is hard to see a time when the elderly will not want this peace of mind and security. In addition, our retirement village environments are very difficult to replicate in the broader community when you consider the village facilities, companionship, beautiful gardens, secure environment and so on that we offer, all on one site.
SI - Do you offer "hotel" style living, that is, rent a unit in one of your villages, rather than own, therefore allowing individuals to free up capital in the latter years of their lives or generally do your customers have enough free cashflow on top of what they might put into buying a unit to allow them to live how they want?
GM - Residents actually often free up capital when they come into a Ryman village, as we offer an affordable product due to our cost advantages. In addition, our weekly fees are very affordable, and in over 20 years we have never increased the weekly fees to an existing retirement village resident. This has given residents real certainty over their weekly outgoings, which is very important for the elderly. We therefore do not offer a rental type model for our independent and serviced units.
SI - As we all live longer and are generally healthier, we are living longer in our own homes. How much of an impact do you think that will have on your business in the long-term as the age when we might want to consider moving to a retirement village moves out?
GM - Our average age of entry is 78+ for independent units, 83+ for serviced units and 85+ for rest home / hospital, so we are catering for the older end of the spectrum rather than the 65’s as some independent retirement villages do. As noted above, people may be living longer, but often frailer due to the health issues of old age. So we see demand increasing, especially with the 75+ population doubling over the next 20 years. Over the long term we may see the average ages of entry noted above increasing, but this will depend on people’s health needs.
SI - Is New Zealand in its infancy in terms of retirement living, in the sorts of complexes you build and run, and if we are how much more advanced are say things in Australia and the United States?
GM - Based on what we have seen overseas, and feedback from overseas investors, our Ryman offering is unique and world class. Self constructing our own villages, with a full range of care options integrated on one site, is uncommon around the world. Most often, nursing or care services are run by different operators to the providers of independent living villages and in different locations. This is not what the older resident wants, as they want the peace of mind and security that they can age in place with the same friends and staff, and stay in the same location as their partner.
SI - How much impact will the recent Government tax changes on building depreciation affect Ryman and will the lower corporate tax rate ameliorate the situation if the company has been impacted?
GM - At this early stage we estimate that we will lose tax depreciation on buildings of $9m to $10m. Shareholders currently pay tax at 33% on our dividends, so they will start to receive the benefit of imputation credits once tax losses accumulated during our investment / growth phase have been utilised over the next 2 to 3 years.
Reader Question - Do you have a maximum debt to equity figure that directors aim to keep below?
GM - Our strategy is to only incur bank debt to fund the construction of new villages, which ultimately fund themselves by the time of full occupancy. We have never incurred debt to fund acquisitions, or share buy backs and the like. In this way, there is no debt on a substantial existing portfolio and we aim to keep this conservative position. Our strong operating cash flows mean that we have been able to invest $730m in new villages since listing in 1999, and we haven’t needed to raise any fresh equity from shareholders to do so. Our current bank debt to equity ratio is only 31%.
SI - What are your biggest challenges as the company expands?
GM - Executing well is our most important focus.
SI - You have a sizable workforce of over 2000. Is there much of a union movement in that workforce or are your employment contracts mostly on an individual basis?
GM - We are a good employer and there is very little union involvement. Staff are on individual employment contracts.
SI - How have you managed the business in relation to your competitors, do they have or will they have an impact on your business in the future?
GM - We don’t manage our business relative to competitors. The demographics mean that if we offer a first class product to our residents at an affordable price then we will do well.
SI - Why have you done better results wise than your listed competition, Metlifecare Ltd [MET.NZ] for such a sustained period?
GM - We only focus on why we do well and don’t really want to compare and contrast ourselves to MET.
Reader Question - It has been suggested to me that Ryman’s success is built on its being a property company, rather than a healthcare one. If there is a significant element of truth in that assertion there would be implications?
GM - First and foremost our core business is looking after the elderly. We are therefore a healthcare company, which meets a very real need from the growing elderly population. Our rest home and hospital beds are purely needs driven, as are our serviced apartments – collectively these account for two thirds of our units / beds. We have shown that we can trade well in a difficult property market, as was evidenced in 2009 when the market fell 10% yet our realised profits increased 5%. Without the absolute healthcare focus we have, our business could well be considered as more a property company.
SI - In my investing experience I have found the level of business leadership in New Zealand wanting – with a few very notable exceptions - when it comes to making good long-term decisions based on sound business skills, the basic understanding of running a business and accountability when it comes to making mistakes and this is often reflected in businesses hiring from an overseas talent pool. What are your views on how we can get good shareholder representation in the boardroom?
GM - I think Boards should always be looking for the right mix of skills, experience and commercial acumen – and not just ticking governance boxes. Real business experience is critical. Of particular importance is that a good balance of directors on the Board understands the perspective of shareholders - by having a reasonable amount of skin in the game through share ownership. This is the best way to get shareholder representation in the Boardroom (along with having the usual respectful dialogue with all forms of shareholders). This contrasts with some theories out there that ‘pure’ independence on Boards (ie no financial interest at all) improves governance – what is important is a good balance.
SI - What company or companies do you admire the most (apart from RYM) that you don't have a financial interest in and why?
GM - I think that Fulton Hogan in Christchurch have done a great job of growing their business in NZ and Australia. They seem to take a good long term approach and look after their staff well. Also I have really respected the way Foodstuffs have successfully responded to the Australian challenge through their Pak N Save and New World stores. Neither businesses try and grab the headlines, they just focus on offering a good product to customers.
SI- Are there any particular books , periodicals or websites that you have read that you would recommend to Share Investor readers in terms of business and investing?
GM - I think that people in business should read Jim Collin’s books – Good to Great, Built to Last, and How the Mighty Fall. All good stuff, practical and not full of MBA jargon. I try not to read too much from economists anymore, the last three years has been proof enough to me that you can’t predict the future – just focus on running your own business extremely well, and mind the farm.
SI - I have read Benjamin Graham's Security Analysis and find it crucial to long-term investing not just in the stockmarket but for investing in general. Have you read it and if you have what have you taken from it as its main points?
GM - I haven’t read it. I think investing is about finding a very good quality company that you would be happy to be the owner of, and then taking a long term perspective.
SI - What does a Chief Financial Officer do and responsible for in a listed company?
GM - A good broad range of stuff! Providing advice to the Board, strategy and planning, forecasting, cash management, banking relationships, financial reporting, maintaining controls, IT, and investor relations. Dealing with the financial and investment community is a very important part of the job.
SI - Who are some of your business mentors/heroes and why?
GM - He will hate me for mentioning his name, but I greatly admire Kevin Hickman (Ryman co-founder). Ryman has been built from the ground up (literally) over 25 years, and the business principles installed in the team many years ago are still just as strongly recognised today. In my experience it is highly unusual for founding principals to be so respected and still part of a large company’s (family) culture.
SI - What do you see as the strongest and weakest quality of your leadership style?
GM - I will have to think about that! Basically I have just worked very hard for many years and tried to get on with people, not matter what their job title.
SI - Where do you see yourself and the business you help manage over the next five years?
GM - Ryman – Double the size, from well managed growth in NZ and Australia and with lots of happy residents and shareholders. Me – I have never really thought more than one year ahead, the ‘to do list’ is too daunting! If I do a good job then there will be lots of good opportunities for me at Ryman.
On Ryman's Australian Expansion
I asked Gordon a question about Ryman moving their business model across the ditch before the announcement last week that they were looking at expanding there, so asked some additional questions about that move.
SI- How long will the first village be assessed before expanding further?
GM – We will carefully assess the entire Australian experience, from land acquisition to consenting to constructing, sell down and operations. During the initial sell down phase of the first stages we will get a good feel for how we are going. We have strict business case criteria for capital pay back of a village and we will set the same criteria as we do in NZ for whether the opportunity stacks up.
SI - Just how much research was done before the move?
GM – We have undertaken substantial research over a number of years. Australia has always been an opportunity for Ryman, and we felt the time was right now to take the next step up.
SI - Is your business model different to how such villages operate in Australia?
GM – We are quite different to many, in that we plan to continue to building and operating our own unique villages (many others simply undertake acquisition activity). Most importantly, what we offer will be different in that we plan to offer the same sort of integrated village with a full range of care as we do in NZ. This means that residents will have the security of having their changing health needs met within one village.
SI - Why Melbourne, Victoria first?
GM – We have a number of contacts in that area and it is easy to get to from Christchurch. That said, other states on the East Coast remain a possibility too.
SI - Will business conditions, employments laws, tax structures etc allow you to operate the way you do in New Zealand or do you have to tweak the model for Australia?
GM – As always we will have adapt to local conditions to a certain extent. However, on the whole the overall industry attractiveness and dynamics are very similar which is good. Encouragingly, build costs are actually lower in Australia and on the care side of things providers can obtain an accommodation bond on top of the weekly fees (in NZ rest home / hospital care offers weekly fees only), which we see as an advantage.
SI - If successful in Melbourne what are 5 year growth plans for that State and other Australian States?
GM – We actually just plan to focus on this first village for now. We will develop our strategy once we have a better idea as to the long term opportunity.
SI - Will you concentrate on growth in Victoria first before other States are considered?
GM – Victoria is our initial front runner, as you need to focus your energies somewhere to get traction, but a site could equally pop up in Queensland or NSW first. Once the first site is underway our plan is just to focus on that before anything else is planned. Thereafter it would make sense to focus our energies in one State for a while.
SI - How will expansion in OZ be funded?
GM – Traditional debt funding from our bankers – ANZ and CBA, and through our strong operating cash flows.
SI - Will RYM consider listing on the ASX sometime in the future?
GM – Yes, this is a real option for us once we have a site established. An ASX listing could be a way to achieve better liquidity for investors and to broaden the base of Australian fund managers in the Ryman shareholder list. That said, we have no plans at this stage and the Board will assess this option when the time is right.
Q & A End.
Disclosure: I own RYM shares in the Share Investor Portfolio
Gordon MacLeod Bio - Supplied by Ryman
Gordon MacLeod is the Chief Financial Officer and Company Secretary of Ryman Healthcare Ltd. Gordon is responsible for investor relations, treasury management, planning and budgeting, financial and management reporting, IT and systems development, taxation compliance, aged care billing and insurances. Previously, Gordon was a Corporate Finance Partner of PricewaterhouseCoopers, and was also the Finance Director of a London listed hi-tech engineering company based in Cambridge, England.
About Ryman Healthcare - Various sources including RYM website
Established in Christchurch in 1984, Ryman draws on over 20 years of experience to provide the best possible retirement living options for its residents.
Ryman Healthcare Limited develops, owns and operates integrated retirement villages, resthomes and hospitals for the elderly within New Zealand. Its villages provide a range of retirement living and care options, including independent townhouses and apartments, serviced apartments, and a care centre providing resthome, hospital and dementia level care. As of March 31, 2010, the Company operated 22 operational retirement villages from Auckland to Invercargill and plans to open two new villages every year. The villages are all designed, built and operated by Ryman. Since listing in 1999 the company has increased profits and dividends ten-fold without seeking any fresh capital from shareholders. The company is a six times winner of Best Retirement Village in New Zealand, serves over 4500 elderly New Zealanders, and employs over 2000 staff.
The Company's subsidiaries operate in the aged care sector in New Zealand. Its subsidiaries include Anthony Wilding Retirement Village Limited, Beckenham Courts Retirement Village Limited, Edmund Hillary Retirement Village Limited, Ernest Rutherford Retirement Village Limited, Evelyn Page Retirement Village Limited, Frances Hodgkins Retirement Village Limited, Grace Joel Retirement Village Limited, Jane Mander Retirement Village Limited and Jane Winstone Retirement Village Limited.
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